[B][B]Australian Dollar Strength May be Tested by Reserve Bank Rhetoric[/B][/B]
[B]Fundamental Outlook for Australian Dollar: [/B][B]Neutral[/B]
- Australian Dollar Retreats on disappointing Retail Sales data
- Reserve Bank of Australian rate expectations nonetheless remain buoyant
The Australian Dollar survived a week of fairly disappointing economic data to finish near yearly highs against its downtrodden US namesake. Historically market-moving Retail Sales and Employment Change reports both proved sharply worse than expected, but the data releases only managed to slow down the Aussie’s rallies against the US Dollar. Of course, sharp rallies in key risky asset classes mitigated the effects of the disappointments; the US S&P 500 registered fresh 2009 highs on several different occasions. Whether or not risky asset classes can maintain their impressive trajectory remains the key question in our Australian Dollar outlook, but traders should likewise keep an eye out for potentially market-moving Reserve Bank of Australia rhetoric through early-week trade.
Previously buoyant RBA interest rate expectations led the yield-sensitive Australian Dollar higher against major forex counterparts, but a recent pullback in forecasts led to commensurate AUD weakness. At their peak, Overnight Index Swaps were pricing in an approximate 50 percent chance that the Reserve Bank would raise interest rates as soon as October. Yet official commentary following September’s rate announcement clearly stated that current interest rates were “appropriate” and instantly poured cold water on interest rate speculation.
Markets will get a closer look at the Reserve Bank’s reasoning behind their neutral stance on short-term rates, and it will be important to watch for shifts in rhetoric on inflation forecasts and future monetary policy tightening. Overnight Index Swaps still price in a marginal probability of a rate hike before the year is through. Any indication that the RBA has ruled out near-term rate hikes could easily hurt the Aussie, while hawkish rhetoric would have the opposite effect. Whatever the outcome, we could see some notable Australian Dollar moves on the minutes from the RBA’s September minutes.
Traders should otherwise keep an eye out for important shifts in risk sentiment. Recently impressive momentum gives us little reason to believe that the S&P 500 may reverse through near-term trade. Yet traders should be wary of trend exhaustion—and treat excessive AUDUSD strength with a sense of caution. – DR